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Surges and instability: The maturity shortening channel

Xiang Li and Dan Su

No 23/2020, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: Capital inflow surges destabilise the economy through a maturity shortening mechanism. The underlying reason is that firms tend to make their debt redeemable on demand in order to accommodate the potential liquidity needs of global investors, which makes international borrowing endogenously fragile. Based on a theoretical model and empirical evidence at both firm level and macro level, our main findings are threefold. First, corporate debt maturity shortens substantially during surges, especially for firms with foreign bank relationships. Second, surges change the shape of the interest rate term structure and lead to a more flattened yield curve. Third, the probability of a crisis following surges with a flattened yield curve is significantly larger than following surges without one. Our work suggests that debt maturity is key to understanding the consequences of capital inflow bonanzas.

Keywords: capital inflow surges; corporate maturity structure; systemic financial crisis (search for similar items in EconPapers)
JEL-codes: F32 F34 F38 F65 G32 (search for similar items in EconPapers)
Date: 2021
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